https://www.ft.com/content/70a4c2e6-ded ... 93ee23ea35
Energy shifts to a buyers market Nick Butler FT
A fundamental shift of power is underway in the world energy market. This is not about the transition from fossil fuels to low carbon or from high cost choices such as nuclear to lower cost gas and renewables. Even more important for producers and investors is the move from a market led by producers to a buyers’ market in which the ability to set prices and choose trading partners lies in the hands of consumers.
The latest example of this is the creation of a buyers’ group led by the three leading Asian liquefied natural gas importers.
At the end of March, three of the largest LNG importers — Kogas of Korea, JERA from Japan and China’s Cnooc — signed a memorandum of understanding agreeing to co-operate in the procurement of LNG. As well the symbolism of such a tie-up between countries that are not always close allies and a set of companies which until very recently have been competitors for supplies, the deal signals the rebalancing of the global market in gas, and in the wider energy sector.
The buyers are in a powerful position. A whole set of new LNG projects started before the fall in prices began three years ago are due on stream within the next two years. The latest report from the International Gas Union lists 28 new plants under construction from Russia to Australia. Some are enormous: Cove Point in the US and the Yamal facility in Russia each has a liquefaction capacity of over 5m tonnes a year.
The problem is that demand for gas, as for other energy sources, is being outstripped by supply. Consumption is rising and in many countries the combination of relatively low emissions (compared with coal), convenience of use against nuclear and low prices makes it an obvious fuel of choice. But it is growing more slowly than supply. The IGU numbers show traded LNG in 2016 rose to 258m tonnes — an increase of 5 per cent year on year. But global liquefaction capacity grew to 339mt, leaving an overhang that helped push prices down.
There is a glut of gas and that will worsen as projects come on stream. Some future projects have been postponed, including several in Australia. Areas with recent discoveries such as East Africa are finding it hard to secure corporate approval for the development of identified resources. Egypt, for instance, is celebrating a series of discoveries but it is not clear when they will be needed.
The surplus is reflected in market prices. In Asia the price for imports is down from as much as $20 per mmbtu in 2013 to less than $6 today. The new surge in US shale production, which will bring more associated gas on to the market, can only add to the saturation. Russia has not given up hope of selling more gas into Europe through Nordstream 2.
This has all created a market in which the buyers have the whip hand.
Since in most parts of the world gas can no longer be flared off as a useless by-product of oil and LNG projects that have already absorbed huge capital investment cannot be abandoned, the answer for producers lies in long-term forward sales deals on terms that will be very advantageous to the consumer. The buyers’ cartel in Asia should be able to do great business. Sellers are in no position to resist flexible contracts and deals giving buyers the right to resell gas.
Buyer power will not be limited to Asia or to LNG. The oil market is also oversupplied. It is not hard to think of suppliers who need revenue: Nigeria, Venezuela and Russia all come to mind.
Nor is it difficult to think of companies that would like certainty that they can sell their output and to make any money they can from projects in which they have invested massive amounts of capital. Chevron’s Gorgon project off shore Australia, which came on stream last year, is just one example. Gorgon cost more than $50b, some $20bn over budget — it’s not just the nuclear sector that makes big mistakes.
Some of this move towards a buyers’ market has taken place already. Iran has continued to export oil despite sanctions. The Iranians have managed to keep trade going through bilateral deals at discounted prices. It is not alone; realised prices from oil and gas supplies do not always match the official quoted numbers.
Such a power shift has consequences. As Opec is finding, it is much harder to set and hold to prices in an age of plenty. As prices fall, so do returns to investors and state revenues. Bilateral deals also reduce the amount of oil and gas traded internationally, creating thin and volatile markets.
More buyers will catch on to the possibility of redrawing the terms of trade. A couple of years ago Donald Tusk, now European Council president, toyed with the idea of creating a single buyer structure to manage all Europe’s gas import needs. Although the challenge of matching the needs of the EU member states would be difficult, the idea is not as fanciful as some critics suggest. With a common purchasing process Europe could certainly secure more favourable deals than it has now.
Markets have a tendency to swing from side to side. There are times when suppliers can name their prices and times when the advantage is against them. We are at the cusp of a major change after half a century of producer control. For the companies involved and their investors this is a hard moment. Some will see it as a cyclical move that will be reversed as demand increases. That is a very risky investment strategy. The better approach for both companies and investors is to assume that we are experiencing a structural shift and that to thrive those involved in the sector must adapt their business model and their investment strategy to a new reality.
Very well put. In gas as in oil markets, the development of US shale has brought about a fundamental economic - and therefore power - shift. The historic cyclical boom and bust to which Nick Butler refers was a function of the risky nature of hydrocarbons exploration. At the shale margin, exploration and production has changed from a risk business to a manufacturing one. The resource is not in doubt, nor, to a large extent, its costs.
@Patrick Heren Spot on Patrick, the shift to a manufacturing business is still so poorly understood yet is the key change. Supply is now scaleable (global shale resources are truly vast) and lead times are short. Shale is a massive geopolitical event, perhaps the biggest since OPEC was created.
Yes, the received wisdom of peak oil etc was totally 100% incorrect. At the same time as most "smart" people thought the USA was going to war in Iraq for oil the reality was that the same G W Bush and Dick Cheyney were kick starting the shale revolution with a slew of tax and regulatory breaks, a revolution that is directly responsible for the world of cheaper and plentiful energy we see today and into the future, to the great benefit of all and particularly the worlds poor. So much received wisdom has turned out to be utter nonsense its hardly surprising experts are no longer trusted and fake news has an open door to walk through.
@RiskManager I think most people peddling the peak oil theory were well aware it wasn't true. It's much easier to convince people to moderate consumption of a pollutant (which wasn't being efficiently used) if they're made to believe (or suspect) it's in short supply. In the interim, thankfully efficiency in a wide range of industries has improved. You should thank the peak oil theory peddlers for their efforts, much like people in the future will thank you for peddling the theory that Dubya & Dick were responsible for the increase in U.S. shale gas production and that in some way makes energy plentiful for everybody on the planet far into the future.
@Ketavan @RiskManager Well I suspect most peakers did believe their story, Mathusian fear is ever popular despite decades of failure of its predictions. As for Dubya and Cheyney they did continue the long policy of federal support for shale https://en.wikipedia.org/wiki/Exemption ... ederal_law
so, unlike peakers, this theory has the added feature of being true
'Since in most parts of the world gas can no longer be flared off as a useless by-product'.... Not long since I saw an FT article stating that flaring is on the increase and the industry has no hope of meeting its 2030 target of zero flaring. Also, the 'relative low emissions' compared to coal is something the industry trumpets but is not borne out when full LCAs are done. Gas is not clean. The FT recently reported the world's flattening CO2 emissions as if they were all greenhouse gases, conveniently forgetting methane, 25 times more powerful. The US was reported to have 3% lower CO2 emissions but there was no accounting for its methane losses...